ECB Raises Interest Rates, Energy Prices Boost European Inflation

Jakarta - The European Central Bank is taking a hard step. Citing a report by The Guardian, Friday, June 12, the European Central Bank or ECB raised interest rates for the first time since 2023 after the Iran war pushed eurozone inflation.

The eurozone is a group of EU countries that use the euro currency. Inflation in the region rose to 3.2 percent in May 2026, from 3 percent in April. The figure is already above the ECB's target of 2 percent.

The ECB raised its key deposit rate from 2 percent to 2.25 percent. The key deposit rate is the interest that commercial banks receive when they deposit funds at the central bank. Financial markets expect this move to be the start of three hikes by next spring.

His concern is simple: rising energy prices will make manufacturers and retailers raise prices to maintain margins.

ECB President Christine Lagarde said the outlook for inflation and the economy remained uncertain as the Iran war continued to push up energy costs.

"The full impact of the war on inflation and medium-term growth will depend on the intensity and duration of the energy price shock, as well as its indirect impact," Lagarde said, quoted by The Guardian.

The increase is also read as a way for the ECB to move faster. In 2022, the central bank was criticized for being slow to raise interest rates after the Russian invasion of Ukraine.

The ECB also raised its main refinancing rate from 2.15 percent to 2.4 percent. This is the interest that commercial banks use when borrowing funds from the ECB.

On the other hand, the economic outlook has weakened. The ECB cut its eurozone growth forecast to 0.8 percent in 2026 and 1.2 percent in 2027. Previously, the projections were 0.9 percent and 1.3 percent, respectively.

Lagarde said growth risks were likely to be dampened as the war in the Middle East added to global policy uncertainty. Long-term disruptions to energy supplies could push energy prices higher and for longer than expected.

Previously, the ECB held interest rates in hopes that the United States and Iran would reach a peaceful agreement. However, the agreement has not been reached. Oil prices are still above US$90 per barrel, far from around US$70 before the war began.

According to The Guardian, the ECB had considered temporarily ignoring the surge in energy prices. However, the rise in oil and gas prices is now clearly driving inflation.

Mark Wall, head of European economics at Deutsche Bank, called this decision an important moment. According to him, the ECB became one of the first major central banks to raise interest rates in response to the energy shock.

However, Wall believes the market is too far away if it expects two more hikes by March. The reason is that the eurozone economy has weakened, unemployment has risen, and growth has slowed.

"The risk of inflation is indeed rising, but the risk of growth is also falling," he said. According to Wall, quoted by The Guardian, one more increase in September is likely enough.

The Bank of England is expected to hold the UK interest rate at 3.75 percent next week. The US Federal Reserve is also expected to hold interest rates, although US inflation is still the highest in the G7, a group of seven advanced economies, at 4.2 percent.

The ECB's decision illustrates the dilemma of central banks as energy prices rise due to the war. Holding interest rates risks keeping inflation high, but raising rates too far could weigh on eurozone economic growth.